MGTC70H (Personal Financial Management) L01

Final Exam

ANSWER 1:
a.
KAT for
b.

Kate

= 0.08(1-0.31) = 0.0552

PV of $80,000 =
BGN
$76,687 +/4.32
5
Comp

c.

e.

$80,000/1.0432

PV
i
n
PMT

PV of $90,000 =
BGN
$85,292 +/5.52
5
Comp

d.

Date: August 28, 2012

KAT for Tom = 0.08(1-0.46) = 0.0432

$76,687

PMTAT = $16,661
Therefore PMTBT = $16,661/(1-0.46)
= $30,854
$90,000/1.0552

$85,292

PMTAT = $18,939

PV
i
n
PMT

Therefore PMTBT = $18,939/(1-0.31)

= $27,448

They both will be better off at any before tax amount of

$27,448 p.a. to $30,854, e.g. $29,000 p.a.

Kr AT for Kate = (1.0552/1.02)-1 = 0.03451

Kr AT for Tom= (1.0432/1.02)-1 = 0.022745

Real after tax annuity for Kate = $28,000(1-0.31) = $19,320/year

Real after tax annuity for Tom = $28,000(1-0.46) = $15,120/year
EPV(Kate)
BGN $19,320 PMT
EPV(Tom)
BGN $15,120 PMT

3.451

PV0

PV1

5n

Comp PV

$90,365

$93,483

2.2745 i

5n

Comp PV

$72,311

$73,956

ANSWER 2:

0.0025 0.9975 0.00274 0.9975 0.99726 0.00303

+
2
3
1.04 +

1.04
1.04
(
)
(
)

NetSingle Pr emium = $100,000

0.9975 0.99726 0.99697 0.00335

4
1.04
(
)

= $100,000(0.002404+0.002527+0.00268+0.00284)
= $100,000(0.010451)
=$1045.10
1

1 1.04 4
( ) 1.04
Pure Level Premiumdue =
1045.10
( )
0.04

= $1045.10/3.629895(1.04) =$1045.10/3.775091 = $276.84 per year

10

-3ANSWER 3:

In terms of Future Values

Grace Period
Rebates
Collision Insurance

(20/(365/12))*0.03*5,000
$5,000*12*0.02
$9*14

Extended Warranty
Card Fee

Total benefits
$120*1.03
=
Net Benefit

5
VisaCard
= $98.63
= 1200.00
= 126.00
500.00
1924.63
-123.60
1801.03

5
MasterCard
(15/(365/12))*0.03*4,000=$59.18
$5,000*12*0.015 =900.00
0

$40*1.03

0
959.18
-41.20
$917.98

VisaCard is a better card

PV of Net Benefits

$1748.57

$891.24

-4ANSWER 4:
a. Monthly payment on a car loan
$35,000
PV
0.5
i
48
n
Comp
PMT

$821.98

($500 12) (1.02 ) + 12 PMT

GDS =
0.30
2
150,000 (1.03)
According to GDS they can afford a monthly mortgage loan payment of $3,458.18

($500 12)(1.02) 2 + (600 + 821.98)12 + 12 PMT

3
=
0.40
2
150,000 (1.03)
According to TDS ratio the maximum monthly mortgage payment they can afford is $3,362.32
TDS

1/ 6

0.04
MonthlyRateOnMortgageLoan = 1 +
1 = 0.003306 = 0.3306%
2

3362.18
PMT
0.3306
i
300
n
Comp
PV
$639,191
Maximum they can pay for a house assuming 20% down payment
$639,191/0.80 = $798,989
b. Total savings required in 3 years = (798,989-639,191) + 6000(1.02)2 = $166,040
After tax rate of return = 5%(1-0.4) = 3%
$120,000
+/PV
$166,040
FV
3
i
2
n
Comp
PMT

3
1

1
1

$19,080

They need to save $19,080 per year for 2 years.

ANSWER 5:
Assumptions:
5
1. Equal split of income for minimum taxes.
2. (1.05/1.02)-1 = 0.0294 = 2.94% p.a. real rate of return on well-diversified mutual fund.
3. Each one of them will get OAS of $473.65x12 = $5,684 p.a. starting age 65
4. Deepak will get $828.75(0.80)(0.88)12 = $7,001 p.a. CPP when he retires at 63.
Sonia will get $828.75(0.80)12 = $7,956 p.a. CPP when she retires at her age 65.

Deeapk
Sonia
Consumption
OAS (D)
OAS (S)
CPP (D)
CPP (S)
Survivor Benefit
Net Before Tax
PVA @ 2.94%
PV (PVA) @ 2.94%

46
48

Sonia Pension
PV of Sonia Pension @ 5%
NET TO FINANCE
RRSPs now @ 2.94%, $100,000
RRSPs dep @ 2.94%, $20,000 p.a.
Total Savings
Deficit

63
65
85
65
67
87
90
$108,000------------------------$72,000-----------$5,684--------$5,684---------------------------$4,005a------------$7,001--------------------------$7,956------------------------------------------------$1,989b-----------$87,359-------$81,675--------$58,050------------$167,304
$1,221,886
$164,390
$167,304
$1,153,088
$86,901

20

$50,000 ----------------------------------------------$704,698
$167,304 + 1,153,088 + 86,901 704,698 = $702,596
$163,656
$433,031
$596,687
$105,909

They have deficit, but it should not be a concern, because mortgage loan which is costing them
$24,000 a year will be paid off in 10 years.
a) OAS after clawback = 5,684 (72,000-60,806)0.15 = 5,684 1,679 = $4,005
b) $828.75(12) -7,956 = $1,989